Crisis Aids Military Contractors

By RICHARD W. STEVENSON, Special to The New York Times

Published: September 10, 1990

LOS ANGELES, Sept. 9—
In some cases, the Pentagon plans to sell weapons to those nations from its own arsenal and in some cases to arrange purchases directly from American weapons makers. When the United States sells an airplane or another system from its own inventory, it typically buys a replacement from one of its contractors.

The biggest beneficiary appears to be the McDonnell Douglas Corporation, maker of the F-15 fighter, which is used in air-to-air combat. The Government is arranging additional sales of F-15's to Saudi Arabia and possibly to Israel as a result of the confrontation with Iraq.

Other companies that stand to gain from increased foreign sales include the General Dynamics Corporation, which makes the M-1 tank. Saudi Arabia is likely to buy additional tanks as a result of the conflict. General Dynamics executives said the United States was also discussing possible sales of additional F-16 attack fighters and Stinger missiles to various Middle Eastern nations.

Benefits for Raytheon and FMC

The Raytheon Corporation could benefit from additional sales of its Patriot air defense system to Saudi Arabia and the FMC Corporation may be able to sell more of its Bradley fighting vehicles to Persian Gulf countries, analysts said.

While providing a financial windfall, any additional sales will not come close to making up for the Pentagon budget cuts of the last few years or the deeper cuts expected throughout the first half of this decade. And although industry executives hope that the confrontation with Iraq will slow the pace of cuts in the military budget, they say the trend in spending for weapons procurement will continue downward.

''The addition of these sales would moderate but not offset the declines we've seen so far in our business and those that we anticipate in the future,'' said Stanley C. Pace, the chairman of General Dynamics.

''A significant reduction in the Soviet threat does require a significant reduction in our armed forces, and therefore in our defense industry, and that will still occur,'' Mr. Pace said. ''I think, however, that the Middle East crisis will dampen some of the extreme political rhetoric with regards to severe defense cuts in the immediate future.''

There is no indication that Congress will restore any of the Pentagon budget cuts decided upon in the House and the Senate before Iraq invaded Kuwait on Aug. 2. Congressional aides say they expect the budget talks between Congressional leaders and the White House to produce a Pentagon spending plan for the coming fiscal year of somewhere between the $283 billion recommended by the House Armed Services Committee and the $289 billion approved by the Senate Armed Services Committee.

''Does this crisis mean we rewrite the defense bill?'' asked one Congressional staff member who spoke on condition of anonymity. ''The answer is no.''

Orders for McDonnell Douglas

McDonnell Douglas could reap substantial benefits from additional foreign sales. The Bush Administration has accelerated plans to sell 12 F-15's to Saudi Arabia and has approved plans to sell an additional 24 of the jet fighters to that nation in the wake of the conflict with Iraq. Those airplanes will come from Air Force inventories. Air Force officials said additional sales to Saudi Arabia and Israel were also under consideration.

Although McDonnell Douglas has not yet received orders for additional planes, the Air Force typically orders as replacements the most up-to-date versions of any planes it sells abroad. In this case, analysts said, McDonnell Douglas can expect orders from the Air Force for its F-15E, which sells for about $35 million a plane.

''The net gain to McDonnell Douglas could be 36 to 48 planes,'' said Howard A. Rubel, an analyst at C. J. Lawrence, Morgan Grenfell Inc. The Air Force had previously planned to end the F-15 program for budget reasons by 1992 or 1993, but 36 additional planes would be enough to keep the production line open for another year.

McDonnell Douglas could also benefit from its program to build the new C-17 transport plane. The plane has been over budget and behind schedule, and Defense Secretary Dick Cheney has scaled back the program to 120 planes, from 210, to save money. Some analysts said the program was at risk of being canceled outright by Congress, but they now say the huge airlift to Saudi Arabia has refocused attention on the need for transport planes. Thus, the C-17's chances are looking brighter.

Big Gain for General Dynamics

For General Dynamics, the biggest gain is likely to be in the M-1A2 tank program. The Army had planned to end the program over the next few years, shutting down plants in Ohio and Michigan. But the company has been trying to win more foreign sales in an effort to keep production going, and additional sales to the Saudis would go a long way toward accomplishing that goal, Mr. Pace said.

The Saudis earlier this year agreed to buy 315 of the tanks. Last week, Administration officials said the United States would sell the Saudis another 385 of the tanks, which sell for more than $3 million each. Paul H. Nisbet, an analyst at Prudential-Bache Securities, said that winning additional business from Saudi Arabia would also help General Dynamics be more price-competitive in its bid to win a big tank order from Britain because it would increase production rates and reduce per-unit costs.

Mr. Pace said there had also been interest from Middle Eastern countries in buying more of the company's F-16 attack fighters, but he declined to be more specific.

Windfall for Missile Makers

If shooting broke out, the biggest immediate financial winners would be the makers of missiles, which would probably be used up at a rapid pace.

''If we go into a hot and heavy shooting war, you could see ordnance expended at the rate of several hundred million dollars a day,'' Mr. Nisbet said.

Companies like the Hughes Aircraft Company, which makes the TOW anti-tank missile; General Dynamics, which makes the Stinger anti-aircraft missile, and the Martin Marietta Corporation, which makes the missiles for Raytheon's Patriot air defense system, could all benefit if the Pentagon replenished its supplies during a war.